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Capital Commitment and Performance: The Role of Mutual Fund Charges

Published online by Cambridge University Press:  02 November 2022

Juan-Pedro Gómez ,
Melissa Porras Prado  and
Rafael Zambrana Open the ORCID record for Rafael Zambrana [Opens in a new window]
Juan-Pedro Gómez
Affiliation:
IE University IE Business School juanp.gomez@ie.edu
Melissa Porras Prado
Affiliation:
Nova School of Business and Economics melissa.prado@novasbe.pt
Rafael Zambrana*
Affiliation:
University of Notre Dame Mendoza College of Business
*
rzambra2@nd.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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We study how the scarcity of committed capital affects the equilibrium distribution of net alphas in the asset management industry. We propose a model of active portfolio management with different sales fee structures where committed capital is in short supply. In the model, a portfolio’s excess return is not fully appropriated by the money manager but shared with long-term investors. Empirically, we show that capital commitment allows funds to hold shares longer and take advantage of slow-moving arbitrage opportunities. Consistent with the model, funds with more committed capital generate higher value added, which, net of fees, accrues to long-term investors.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 727 - 758
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

This work was funded by the Fundação para a Ciência e a Tecnologia (UID/ECO/00124/2019, UIDB/00124/2020, UIDP/00124/2020, and Social Sciences DataLab PINFRA/22209/2016), the POR Lisboa and POR Norte (Social Sciences DataLab PINFRA/22209/2016), the Spanish Ministry of Economy and Competitiveness (MCIU), the State Research Agency (AEI), and the European Regional Development Fund (ERDF) Grant Nos. PGC2018-101745-A-I00 and PID2021-125359NB-I00, and MCIN/AEI/10.13039/501100011033/FEDER (UE Grant No. PID2021-125359NB-I00). Gómez thanks the Bank of Spain for its generous support. Prado also acknowledges financial support from the NOVO BANCO Entrepreneurship & Technology Chair. We especially thank Tim Adam, Vikas Agarwal, Fernando Anjos, Guillermo Baquero, Gjergji Cici, Jennifer Conrad (the editor), Richard Evans, Miguel Ferreira, Alexander Kempf, Vikram Nanda, Giorgio Ottonello, Arthur Petit-Romec, Clemens Sialm, David Stolin, Neal Stoughton, Ran Xing (the referee), and Fernando Zapatero for their helpful comments. We also thank seminar participants at the 2019 Finance Forum at Carlos III University, the University of Houston, CFR Cologne University, the University of Arizona, the University of Texas at Dallas, the University of Virginia, ESMT Berlin, the 2019 Lubrafin Conference, the University of Texas at Austin, Nova SBE, the Skema Business School, the Universitat Illes Balears, the Hebrew University of Jerusalem, the Universidad Autónoma de Madrid, and VAMSS seminar series.

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